W18281

AMOREPACIFIC HONG KONG: MARKETING KOREAN BEAUTY

PRODUCTS

Hugh Thomas, Andrew C.F. Chan, Howard Lam, Andy Wong, and Canice Man Ching Kwan wrote this case solely to provide material
for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors
may have disguised certain names and other identifying information to protect confidentiality.

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Copyright © 2018 Ivey Business School Foundation Version: 2018-05-03

The Hong Kong market is really competitive. It is a showcase market. If you do well in Hong
Kong, there is a great halo effect on the Southeast Asia and the Greater China market. We bear a
key mission: to bring AMOREPACIFIC Group’s products one at a time into Hong Kong and to
build up our reputation and consumer base.

Fion Ipp, managing director, AmorePacific Hong Kong Co. Ltd.

Towards the end of 2016, Fion Ipp, managing director of AmorePacific Hong Kong Co. Ltd. (APHK),
wondered what marketing strategies she should implement to continue the achievement of APHK’s
mission. Having identified her customers’ behavioural patterns, she had to consider the marketing tools in
the consumer decision journey; the competitive positioning of her brands; and the distribution of the budget
between traditional and digital channels for each of her four brands in the upcoming bi-monthly campaigns.
She needed to strike an appropriate balance within APHK’s overall strategy between recruiting new
customers and retaining existing customers.

Chinese consumers’ demand for cosmetics and skin care products (hereafter called beauty products) was
booming. China had overtaken Japan to become, after the United States, the second-largest market of beauty
products in the world, with estimated annual sales of US$30 billion 1 and an annual growth rate exceeding
40 per cent (see Exhibit 1). Ipp estimated that over half of her Hong Kong consumer base consisted of
mainland2 tourists visiting the number one offshore shopping destination for mainland Chinese tourists—
Hong Kong. However, the number of tourists to Hong Kong from mainland China declined by 2.5 per cent
from 2014 to 2015, and by 7.4 per cent from the first half of 2015 to the first half of 2016 (see Exhibit 2).
According to the government of Hong Kong’s Census and Statistics Department, luxury spending in Hong

1
This estimate was based on the total sales of beauty products for China and Japan in 2012 (see Exhibit 1) and projected
using World Bank statistics as a function of the rate of the annual gross domestic product growth in China (5.1 per cent versus
6.9 per cent versus 7.4 per cent in 2012, 2013, and 2014, respectively) and Japan (1.8 per cent versus 1.6 per cent versus
−0.1 per cent, respectively).
2
The terms “mainland China” and “mainland” refer to the People’s Republic of China, excluding Taiwan, and the special
administrative regions of Hong Kong and Macau.

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Kong shrank by 13.7 per cent and 15.6 per cent in 2014 and 2015, respectively. Spending in the cosmetics
sector had gone from 9.3 per cent growth in 2014 to a −1.9 per cent decline in 2015. 3 As the pessimistic
outlook escalated, APHK’s Korean competitor, Missha (part of Able C&C Co. Ltd.), abruptly halted its
business in Hong Kong when its local partner collapsed. As a Hong Kong property company executive
commented upon hearing the news, “South Korean cosmetics brands can become popular rapidly and
easily, but that popularity can fade fast, too.” 4

However, even faced with these challenges, Ipp remained optimistic because APHK had sustained an
annual sales growth rate of 30 per cent in 2015. As she turned her attention to formulating the next year’s
marketing strategy, she reflected on how she and her team had built APHK to achieve its strong market
position in Hong Kong. Looking forward, she resolved to allocate her marketing resources to increasing
APHK’s competitiveness.

FROM KOREA TO GREATER CHINA: COMPANY BACKGROUND

Although AmorePacific Group (AP) was established in 1945, its origins went back to the 1930s, when Yun
Dok Jeong, the grandmother of AP’s chairman, Suh Kyung Bae, started a business extracting camellia seed
oil for beauty products. Her son and then her grandson developed the mission of “Beautifying the World”
to build AP into the largest cosmetics company in Korea, and a company named by Forbes as one of the
most innovative in the world.5 AP developed concepts of traditional beauty with a rich Asian heritage,
aiming to help women achieve a healthy and beautiful lifestyle from the inside out. Its brands and products
catered to a variety of needs and to consumers of different ages. Each of its brands had products ranging
from skin care (for example, moisturizing, anti-aging, brightening, and other products) to colour cosmetics
(see Exhibit 3). For the composition of market shares of companies and brands in Hong Kong for makeup
(also called colour cosmetics) and for skin care, see Exhibits 4 and 5, respectively.

By 2015, AP had become associated with Korean beauty (K-beauty)—innovative products and high-quality
ingredients helping women to explore their beauty potential, with good value for money. In The Wall Street
Journal, Dana Wood noted, “K-Beauty—the umbrella term for all South Korean imports in the skin care,
makeup and bath-and-body categories—has been attracting fans . . . it’s cultivated a certain gentle, nature-
meets-technology ethos.” 6

The phenomenon was explained in fashion magazine Elle: “First there was cute fashion blushers, then
alphabetized bb, cc and dd [skin care] creams came along,” and now there was K-beauty. In answer to the
question, “Why has Korea spurred such a worldwide beauty phenomenon?” the Beauty Team at the
magazine said, “Because their [Koreans’] beauty aesthetic is so different to ours—so focused on health,

3
“Report on Monthly Survey of Retail Sales,” Census and Statistics Department of Hong Kong, January 2018, accessed April
6, 2018, www.censtatd.gov.hk/hkstat/sub/sp320.jsp?productCode=B1080003.
4
Thomas Chan and Denise Tsang, “Korean Cosmetics Firm Missha Suddenly Closes Hong Kong Outlets,” South China
Morning Post, January 3, 2015, accessed October 5, 2017, www.scmp.com/news/hong-kong/article/1673101/korean-
cosmetics-firm-missha-suddenly-closes-hong-kong-outlets; After a six-month absence, Missha re-entered Hong Kong in June
2015, partnering with a new Swiss-owned company, DKSH (DiethelmKellerSiberHegner); “Missha Hong Kong Makes Return,”
Inside Retail Hong Kong, July 15, 2015, accessed October 5, 2017, https://insideretail.hk/2015/07/15/missha-hong-kong-
makes-return.
5
Grace Chung, “How South Korea's AmorePacific Became One of the World’s Most Innovative Companies,” Forbes, August
19, 2015, accessed May 3, 2016, www.forbes.com/sites/gracechung/2015/08/19/how-south-koreas-amorepacific-became-
one-of-the-worlds-most-innovative-companies/#75d0d92689cf.
6
Dana Wood, “K-Beauty: The Exhausting Skin-Care Regimen That May Be Worth the Effort,” Wall Street Journal, April 6,
2016, accessed February 15, 2018, https://www.wsj.com/articles/k-beauty-the-exhausting-skin-care-regimen-that-may-be-
worth-the-effort-1459970031.

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hydration . . . the products that come out of Asia have high specific standards to enable those things, and
our skin can only benefit.” 7

AP chose Hong Kong as a strategic bridgehead for its expansion into the Greater China Region and the rest
of the world starting in 1990, but it was not until 2001 that its efforts began to bear fruit. In that year, Ipp
joined the company to found APHK and in subsequent years chose four brands from AP’s 26-brand
portfolio for Hong Kong. She started with LANEIGE because of its appeal to Hong Kong women in their
20s and 30s who perceived that Korean women had good skin and sophistication, and who were open to
new beauty products that gave good value for money. LANEIGE portrayed itself as expert in hydration,
with five series of products focusing mainly on moisturizing and whitening, among which the hydrating
Water Bank series was the most popular in Hong Kong.

Two years later, in 2004, APHK launched Sulwhasoo, a beauty brand that began with a strong belief in the
stimulative and restorative benefits of ginseng and a passion for Korean herbal medicine. Unlike
LANEIGE, Sulwhasoo had a more luxurious image, and it was positioned at the upper end of the luxury
segment to stand out from the competition in the mid-class segment. Continuing upmarket, APHK launched
the eponymous brand AMOREPACIFIC in 2014, which was the most luxurious brand of the group and
used nothing less than the best Asian botanical ingredients and the latest technology. AMOREPACIFIC
and Sulwhasoo targeted consumers in their 40s and 50s with mature skin and concerns about aging. These
consumers seldom switched brands under the influence of advertising and promotions; rather, they often
relied on positive word-of-mouth and sought to understand the stories behind the brands. At the same time,
Ipp and her team introduced beauty services including facial treatments and spas to strengthen the
perception of exclusiveness.

In 2014 and 2015, AP consolidated its business in Hong Kong, acquiring shares of APHK and transferring
to APHK the Hong Kong operation of ETUDE HOUSE. ETUDE HOUSE targeted young consumers who
had almost no experience using beauty products but who were highly curious about them. ETUDE HOUSE
not only emphasized product quality; it also targeted consumers with eye-catching designs and fancy brand
stories. ETUDE HOUSE was a playful brand with two distinctive features―a vast variety of choices
(offering over 500 new items annually) and trendy sweetness (using K-Pop and K-trends in its
communication).

With AMOREPACIFIC, ETUDE HOUSE, LANEIGE, and Sulwhasoo, APHK had four AP brands
covering segments that ranged from entry-level through premium and luxury. 8 In addition, APHK offered
advice to AP on its Hong Kong launch of a medical beauty-specific brand, Aestura, which offered its
products exclusively to clinics and hospitals, and on its expansion strategy in mainland China, Singapore,
Malaysia, Vietnam, and Thailand.

Within mainland China, Korean brands had become increasingly competitive. In the first half of 2015,
although France remained the largest supplier of imported beauty products to China, holding a share of 30.6
per cent, and the United States was the second-largest supplier, Korea was the third-largest supplier, with
its beauty products accounting for nearly a quarter of the imports of beauty products to China (see Exhibit
1). For the background and performance of major brands in China, see Exhibit 6. Moreover, the retail sales
of Korean beauty products in China had grown from 2010 to 2015 at a compound annual growth rate of
over 10 per cent. AP was confident that its products in Greater China had a bright future.

7
The Beauty Team, “What Is K-Beauty? Everything You Need to Know about Korean Skincare,” Elle UK, November 28, 2017,
accessed February 15, 2018, www.elleuk.com/beauty/k-beauty-what-is-it-korean-beauty-10-step-beauty-cleansing-skincare.
8
Although Innisfree (a mid-class AP brand) was available in Hong Kong, it was distributed through a subsidiary of AP separate
from APHK. Mamonde, a mass AP brand, was distributed in China but not in Hong Kong (see Exhibit 3).

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HOW APHK RECRUITED AND RETAINED CONSUMERS

Brand Philosophy

Ipp believed that the front-line staff—and not the management—of a service company were the
determinants of healthy growth. However, the management was responsible for setting up systems to foster
that employee-led growth. Through centralizing duty reporting and orientation programs, embedding
action-based key performance indicators in appraisal, and complementing appraisal with a bi-annual reward
scheme, Ipp sought to internalize AP’s vision to be “the Asian Beauty Creator.”
APHK was a customer service business with over 500 sales staff in over 50 shops serving hundreds of
thousands of consumers annually. In the service business, Ipp believed “you have no second chance to
create a first impression.” She hoped to cultivate within her organization a caring and supportive culture.
On the first day on the job, every new member of APHK’s staff was sent to perform community work, such
as serving the elderly in one of Hong Kong’s poorer neighborhoods. Thereafter, regular community service
was built into the work life of all staff members. As the company song expressed it:

Let me make the world a prettier place,

In my own unique ways,
This belief, you can see it in my eyes,
I vow to try, for the beauty I see in you.
Let me make the world a prettier place,
Promise to love others more than myself,
Soaring high with your hands in mine, partners forever.

And as Ipp said,

A successful brand walks with two legs—marketing communication and service. AP provides us
with the best products in the category. But then, it relies on our team, and particularly our front-
line sales, to advocate a message that AP products bring good value for money to consumers. It’s
critical for us to make consumers feel that we truly care about them from the heart. By doing so,
we can see from our experience that consumers develop relationships with us, spread positive
stories about us, and even defend us when we make mistakes.

APHK aligned its marketing strategies and budget with its values. Ipp believed that value for money
could be delivered only when corporate values were put into action, explaining,

A business is like a tree. As long as its roots are strong enough, the tree will not wilt due to bad
weather. Similarly, APHK is built on four competences—customer engagement, brand aspiration,
team loyalty, and operational efficiency. We engage customers with our passion and services
(customer engagement). Our products exceed customers’ expectations of quality and functionality
(brand aspiration). With a caring and supportive culture, we have a heightened sense of belonging
and clear goals in striving for common good (team loyalty). Under the bottom-up structure, we
keep improving operational efficiency with inspiration from our front-line colleagues (operational
efficiency). As our competence is rooted in aligned values, APHK can consistently deliver value
for money to consumers and overcome the ups and downs in the external environment.

Integrated Marketing Communication

The digital age increased the touch points connecting consumers with brands. For example, a McKinsey study
found that more than 60 per cent of consumers of facial skin care products would conduct online research

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about the products after purchase. 9 Social media shifted one-way communication to two-way conversations
between marketers and consumers, fundamentally changing how consumers engaged with brands.

APHK used paid, owned, and earned media. 10 It alternated between traditional and digital media to recruit
and retain consumers—raising awareness, enhancing brand comprehension, shaping preferences,
prompting purchase action, and building the habit of loyalty (see Exhibit 7). Each objective targeted a
particular stage in the decision journey. 11

Awareness: APHK extensively used traditional media channels such as television commercials, print
advertisements, and outdoor billboards to create a visual impact and raise consumer awareness. In 2001,
when APHK launched LANEIGE Hong Kong, consumers possessed little awareness and knowledge about
Korean brands. Most of them did not even know how to pronounce the French “LANEIGE.” Although only
the fast-moving consumer good category used TV commercials at that time, Ipp broke from the norm and
launched a campaign for APHK of highly successful TV commercials to promote LANEIGE. Ipp believed
that traditional media forms were irreplaceable in reaching a broad array of consumers and creating brand
awareness. APHK relied on traditional media, especially for luxury brands like Sulwhasoo, even as its use
of digital media increased.

Comprehension: Excluding the Internet, print ads continued to be one of the most effective media forms
for building brand knowledge. Ipp noted with pride that APHK had once pooled its entire budget to publish
a 10-page ad in a Hong Kong beauty magazine to educate consumers about K-beauty and its brands. No
beauty product competitor before or since had campaigned this way in Hong Kong. Ipp heralded the
campaign as a success in enhancing consumers’ brand knowledge, breaking new ground, and catching the
imagination of consumers.

APHK used press releases and other company-controlled media, including its websites, to transmit
information about its brands to consumers, but Ipp placed more weight on consumer-created earned
media—communities of brand enthusiasts. Taking advantage of the viral nature of digital content, APHK
used online social platforms to update consumers about its brands and products as well as trends in beauty
and fashion. Digital media was critical in maintaining awareness of the brands and products; and through
interactions with consumers, it deepened their brand knowledge.

Liking: Content and buzz marketing—the marketing technique of creating and distributing valuable,
relevant, and consistent content to attract and acquire a clearly defined audience, and of getting more people
to see a product being used in public and hear about it from people they knew and trusted—helped
consumers evaluate different brands throughout the decision journey. 12 Ipp noted that these marketing

9
David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik, “The Consumer Decision Journey,” McKinsey Quarterly,
June 2009, accessed May 9, 2016, www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-consumer-
decision-journey.
10
David Edelman and Brian Salsberg, “Beyond Paid Media: Marketing’s New Vocabulary,” McKinsey Quarterly, November
2010, accessed February 22, 2017, www.mckinsey.com/business-functions/marketing-and-sales/our-insights/beyond-paid-
media-marketings-new-vocabulary; Mitchell J. Lovett and Richard Staelin, “The Role of Paid, Earned, and Owned Media in
Building Entertainment Brands: Reminding, Informing, and Enhancing Enjoyment,” Marketing Science 35, no. 1 (2016): 142–
157; see also Nick Burcher, Paid, Owned, Earned: Maximizing Marketing Returns in a Socially Connected World (London,
UK: Kogan Page Publishers, 2012).
11
Jeffrey Hui and Howard Pong Yuen Lam, “Chapter 3: Five Steps to Understand Consumer Buying Behaviours,” Brand
Hyperlinks – Successful Learning From Ten Top Marketers, (Hong Kong: ET Press, 2016): 64–77; see also David C. Edelman,
“Branding in the Digital Age: You’re Spending Your Money in All the Wrong Places,” Harvard Business Review 88, no. 12
(2012): 62–69. Available from Ivey Publishing, product no. R1012C.
12
Josh Steimle, “What Is Content Marketing?,” Forbes, September 19, 2014, accessed May 9, 2016,
www.forbes.com/sites/joshsteimle/2014/09/19/what-is-content-marketing/#71a83a5a1d70.; “What’s the Buzz about Buzz
Marketing?,” Knowledge@Wharton, January 12, 2005, accessed May 9, 2006,
http://knowledge.wharton.upenn.edu/article/whats-the-buzz-about-buzz-marketing.

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techniques were at least as critical as building awareness and driving the initial purchase. With advances in
technology, it became possible to track online activities (e.g., which type of content attracted consumers to
read it and the type of information they searched for) and to match consumers with relevant content in later
encounters. Since content was increasingly relevant to consumers lives, they were more likely to share it
both online and offline, creating brand buzz and giving AP earned media exposure.

Ipp and her team employed these marketing techniques to build brand aspirations. A team in content
marketing at APHK was responsible for analyzing which types of content best fit with the targeted segments
of a campaign. It also paid social networking sites such as Facebook to show relevant brand ads to the
consumers who had searched or navigated its social networking site pages.

Action: Consumers often put off a purchase decision until they were actually in the store. Point-of-purchase
marketing could either persuade or dissuade consumers. Ipp recognized that consumer interactions with
sales staff provided the most direct channel to increase consumers’ product knowledge, so she emphasized
showing genuine care to consumers to give them a satisfying in-store experience. She believed that caring
service could engage even those consumers who entered a store without planning to buy.

APHK also employed mobile technology to keep track of potential consumers. Within specific geographic
locations in shopping malls and on certain occasions, the system would automatically send mobile alerts
via SMS(short message service) to the targeted consumer, providing tailored messages that included
discount coupons; contest opportunities; special event invitations; and other unique, brand-specific content.
In this way, APHK could get in touch with consumers at the right time, in the right place, and further engage
them with distinctive point-of-purchase features.

Habit: Ipp was excited about the potential of digital media to revamp customer relationship management,
integrating art with science. Although APHK had long provided extensive on-the-spot and after-sale
services in order to manage customer relationships, detailed analysis of its large, diverse customer base for
customizing responses and offers had been difficult and costly. Digital marketing, however, facilitated
customer relationship management, allowing for the analysis of customer behaviour throughout the entire
relationship with APHK. Based on an analysis of transaction history, for example, APHK differentiated
local, mainland, and foreign customers. It identified those who had not made a purchase for three months,
six months, or one year, allowing it to approach a specific customer with a tailored post-purchase email at
a specific time to re-engage her with appropriate incentives.

APHK based its consumer analyses on various online and offline sources of big data, 13 which the company
gathered at different encounters with consumers to inform its marketing strategy. APHK’s database
contained records of customer demographics, past purchases, and responses to marketing communications,
all assembled with the customer’s consent. These records allowed APHK to perform precise market
segmentation. Ipp pointed out,

Today is an era with challenges and excitement for marketers. Based on our experience, we play
around with various technologies and tactics. No one really knows how to strike a balance between
traditional and digital marketing. Neither would one know if digital marketing communications
will replace the traditional ones one day. We are still learning and should keep learning.

13
SAS, a software suite, defined big data as “a term that describes the large volume of data—both structured and
unstructured—that inundates a business on a day-to-day basis. But it’s not the amount of data that’s important. It’s what
organizations do with the data that matters. Big data can be analyzed for insights that lead to better decisions and strategic
business moves.”; “Big Data: What It Is and Why It Matters,” SAS, accessed January 18, 2018,
https://www.sas.com/en_ca/insights/big-data/what-is-big-data.html.

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Different forms of digital marketing communications were used for the five AP brands marketed in Hong
Kong (see Exhibit 8) with respect to different stages of the consumer decision journey.

Budget Allocation

Keeping the consumer decision journey in mind, Ipp turned her attention to the marketing budget allocation
(see Exhibit 9). She recognized the importance of targeting the right consumers, whether in recruiting new
consumers or retaining existing consumers, and of reaching the target consumer at the moment when
marketing most influenced the consumer decision. Given APHK’s brand portfolio and marketing mix, Ipp
considered the strategies she should follow in the coming year.

APHK’s annual marketing budget was allocated on a campaign basis. Each year, the company ran about
six advertising campaigns spread roughly two months apart. Each campaign had a primary focus and a
secondary focus. A primary focus could be used to launch a new product within a brand, while a secondary
focus could be used to re-push a product within a brand—or to relaunch or reposition an existing product.
It could strive to retain specific existing consumers or recruit new consumers. It could focus on traditional
or new media. The introduction of an entirely new brand, augmenting the four brands AP currently offered,
could involve several campaigns.

Rather than spreading the budget thinly across all lines, products, consumers, and media, a campaign
focused on specific products at one time and employed the media that could optimize marketing
effectiveness. Ipp explained, “For example, a winter campaign’s primary focus could be moisturizing
whereas a secondary focus could be foundation—because once your skin is better, you will look more
attractive when using foundation.”

She commented on the differences between cosmetics and skin care campaigns as follows:

Usually, when it comes to makeup products, the marketing materials are more dynamic, more
attractive, more colourful, and maybe more storytelling. And so with makeup campaigns we are more
able to utilize digital channels, because we can express [our message] better and it really attracts
people. But comparatively, with skin care, marketing materials are relatively static. Whether it’s the
colour or the storytelling, it’s more fact-based. Although there are many profound technologies in
marketing, it’s not like makeup, where we have a lot of demonstrations with different colours and
active illustrations. So relatively speaking, skin care uses more traditional marketing.

Yet the boundaries between traditional and digital marketing were blurring, as Ipp explained,

The media environment is changing so quickly . . . so there is no magical guideline. We set a year’s
budget but then have a semi-annual or quarterly media review, looking at the changes in the media
environment and our consumers changes in their media consumption, so we have to always check
through which channels our consumers are getting their information.

She added,

In the past, we used to allocate the budget by department. It makes sense, right? We had a brand
marketing department and they had their budget for TV, print, and outdoor on a product basis. Then
we had our digital marketing department, and the digital marketing department had its own budget.
But two years ago we decided that was not the right way to go, because every campaign’s character

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was different. And if we are so rigid dividing the budget by department, it does not necessarily lead
to the most effective results. So now we encourage these two departments’ employees to work
together. The objective is to maximize the business impact of the campaign. . . . Today, marketers
should possess knowledge and skills on both traditional and digital marketing communication and
use them flexibly. In the long run, digital is not a separate function.

Past campaigns for high-end brands like AMOREPACIFIC and Sulwhasoo had tended to rely on traditional
marketing channels such as print ads because APHK considered them effective for enhancing the luxury
image for the target consumers. LANEIGE campaigns had also used traditional channels to maintain top-
of-mind awareness for young women from diverse backgrounds in their 20s and 30s, yet LANEIGE had
relied more on TV commercials than print ads. For all three brands, digital marketing had played a
supplementary role, mainly in cultivating the brands’ depth with references to their stories or heritage.

Rather differently, ETUDE HOUSE relied more on digital channels because its target consumers were high
school and university students. These digital savants spent most of their waking hours online, and many did
not even watch TV broadcasts. ETUDE HOUSE relied on a combination of digital media presence and
service in its storefronts to build the high customer engagement, so it had placed almost no emphasis on
traditional marketing.

Ipp reflected on how the changing economy and consumer base affected her sales:

When the economy is good, there is the good economy challenge. When the economy is bad, there
is the bad economy challenge. I still can’t figure out whether the challenge is worse when the
economy is bad. When the economy is doing well, it is so difficult to expand, and operating costs
are increasing so much. And competitors may want your staff to work for them. . . . Competition is
so serious. . . . It’s really a question of how your team faces the challenges. Once your team spirit
is good and your objectives are clear, even if we are in a trough, we will find a way to succeed.

As Ipp turned to the marketing strategy of her four brands for the coming year, she reviewed APHK’s
sustainable competitive advantages. The question before her, given the changing environment, was what
balance to strike between retaining and expanding her clientele, between Hong Kong residents and tourists,
and between traditional and digital media. She also had to determine how APHK’s marketing strategy could
meet APHK’s Hong Kong objectives while also contributing to AP’s overall mission in China, Asia, and
the rest of the world.

The authors are grateful for the financing provided by the Victor and William Fung Foundation to
the Fung Service Leadership Initiative, and for the support provided by the Executive MBA
Program at the Chinese University of Hong Kong.

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EXHIBIT 1: GLOBAL BEAUTY PRODUCT MARKETS

United
United United Hong
Brazil France Russia Arab Japan Korea China
States Kingdom Kong
Emirates

Total Sales in 2012 (in US$

55.3 21.1 3.5 19.8 13.9 4.9 27.3 8.4 25.9 1.1*
billions)

Sales per Capita** (in US$) 176.1 103.4 54.9 300.5 97.2 544.4 215.0 167.3 19.1 150.0

GDP per Capita*** (in US$) 56,300 15,800 41,200 41,400 23,700 67,000 38,200 36,700 14,300 57,000

Value of Domestically Produced

Cosmetics Exported to China 194 – – 513 – – 265 371 – –
(in US$ millions)****

Percentage of Domestically
Produced Cosmetics Exported 11.8% – – 30.6% – – 15.8% 22.1% – –
to China****

Note: GDP = gross domestic product; *Authors’ estimate; **Sales per capita were estimated by dividing total sales of beauty products by population as of December 2012; ***GDP per
capita compares GDP on a purchasing power parity basis divided by population as of July 1, 2015; ****Value and percentage of cosmetics exports were based on statistics from January
to July 2015.
Source: China-Britain Business Council, Targeting Chinese Consumers: A Guide for UK Businesses 2014, 2014, accessed May 17, 2016, www.cbbc.org/NetC.CBBC/cbbc/f4/f472d9d5-
34d9-447d-a464-186be3deff07.pdf; “Population, Total,” The World Bank, accessed May 17, 2016, http://data.worldbank.org/indicator/SP.POP.TOTL; “The World Factbook: Country
Comparison: GDP – Per Capita,” Central Intelligence Agency, accessed May 17, 2016, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html; Lee Hyo-sik,
“Cosmetics Exports to China Surge 250%,” Korean International Trade Association, July 9, 2015, accessed January 20, 2018,
www.kita.org/global/ecoView.do?seq=15189&searchWrd=cosmetic&pageIndex=1.

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EXHIBIT 2: TOURIST COMPOSITION IN HONG KONG

% Change % Change
Jan—Dec 2014 Jan—Dec 2015 versus Jan—Jun 2015 Jan—Jun 2016 versus
One Year Ago One Year Ago
Total 60,838,836 59,307,596 −2.5 29,327,240 27,160,274 −7.4

Mainland China 47,247,675 45,842,360 −3.0 22,846,524 20,415,710 −10.6

Other Short-Haul
8,407,120 8,298,122 −1.3 3,934,699 4,159,782 +5.7
Markets*

Long-Haul Markets** 4,268,856 4,284,287 +0.4 2,097,848 2,158,986 +2.9

New Markets*** 915,185 882,827 −3.5 448,169 425,796 −5.0

Note: *Arrivals from Taiwan, Japan, South Korea, Indonesia, Malaysia, Philippines, Singapore, Thailand, and others; **Arrivals from the United States, Canada, the United Kingdom,
France, Germany, Australia, and others; ***Arrivals from India, Russia, the Netherlands, Vietnam, and Gulf Cooperation Council markets (including Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia, and The United Arab Emirates).
Source: Hong Kong Tourism Board, Monthly Report – Visitor Arrival Statistics: Dec 2015 and Jun 2016, 2016, accessed January and August, 2016,
https://partnernet.hktb.com/en/research_statistics/latest_statistics/index.html?gvHelperp=1.

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EXHIBIT 3: AMOREPACIFIC FLAGSHIP BRANDS—EXPANSION HISTORY, TARGET, PRODUCTS, AND PRICING

Number
Year of Targeted
Year of Entry of Brand Key Products Key Products
Entry Segments Pricing
(Hong Kong) Overseas Motto (Skin Care) (Colour Cosmetics)
(China) by Age
Markets
A trendy brand • BB Cushion
2002 • Water Sleeping Mask
offering a total • Two Tone Lip Bar
LANEIGE (Under 2003 13 25–40 • Water Bank Essence Premium
solution for sparkling • Water Supreme Primer
APHK) • Water Bank Cream
beauty Base
• First Care Activating
Serum
2004
Holistic beauty from • Essential Balancing Upper
Sulwhasoo (Under 2011 9 40+ • Perfecting Cushion
Asian wisdom Water Luxury
APHK)
• Concentrated Ginseng
Renewing Cream
Girlish and playful • Moistfull Collagen Cream • Precious Mineral Any
2012
ETUDE make-up brand to • Wonder Pore Freshner Cushion
(Under APHK 2013 12 15–25 Mass
HOUSE realize a life-is-sweet • AC Clean Up Acne Care • Lips Talk
since 2014)
experience Series • Play 101 Stick

High performance • Time Response Series

2014
AMORE- anti-aging skin care • Skin Renewal Ampoule  Anti-Aging Colour Upper
(Under n/a 1 40+
PACIFIC powered by Asian • Skin Renewal Creme Control Cushion Luxury
APHK)
botanicals • Eye Renewal Creme
• Flower Essential Masks • Powder Pact Blooming
A brand that inspires
• Rose Honey Sleeping Mask • Stamping Edge Lip Tint
Mamonde n/a 2005 2 25–40 feminine beauty with Mass
flowers • 7 Days Project • Natural Cake Eyebrow
Nutrition Sheet Mask Kit
2013
• The Green Tea Seed Serum • Auto Eyebrow Pencil
(Under Natural benefits
Innisfree* 2012 6 25–40 • Jeju Perfumed Hand Cream • No Sebum Blur Powder Masstige
another AP from Jeju
subsidiary) • It’s Real Squeeze Masks • Mineral Makeup Base

Note: APHK = AmorePacific Hong Kong; n/a = not available; *Innisfree operated under a “fast cosmetics retail model” under a separate subsidiary company in Korea, Hong Kong, and
worldwide.
Source: 2014 AmorePacific Group Sustainability Report, 2014, accessed February 20, 2018, https://www.apgroup.com/int/en/dam/misc/2014_AMOREPACIFIC_SR_English.pdf; company
records.

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EXHIBIT 4: COMPOSITION OF MARKET SHARE FOR COMPANIES AND BRANDS

IN HONG KONG—MAKEUP

Composition of Market Share by Company

20% 19.0%
18.3% 18.1% 18.4%
17.4%

15% 13.5% 13.4% 13.1% 13.0%

12.3%

12.6% 12.5% 12.6%

12.4% 12.3%
10% 9.2%
6.9% 7.0% 7.0% 7.1%

5% 4.1% 4.1% 4.0% 4.0% 4.1%

0%
2011 2012 2013 2014 2015
AMOREPACIFIC (Korea) L’Oréal (France) Estee Lauder (United States)
P&G (United States) Shiseido (Japan)

Composition of Market Share by Brand

Company and Origin Brand 2012 2013 2014 2015

LANEIGE 6.4 6.2 6.2 7.3
Sulwhasoo 0.6 0.8 0.9 1.8
AMOREPACIFIC (Korea)
ETUDE HOUSE n/a
Innisfree n/a
Lancôme 6.3 6.2 6.1 5.8
L’Oréal (France) L’Oréal Paris 1.6 1.6 1.6 1.3
Shu Uemura 1.2 1.2 1.2 1.3
Estée Lauder 8.2 9.0 8.2 7.2

Estee Lauder (United Bobbi Brown 4.2 4.4 4.6 4.5

States) Mac 3.5 3.5 3.5 3.6
Clinique 1.8 1.8 1.8 1.7
Maybelline 3.4 3.3 3.3 3.1
Proctor & Gamble (United
States) Max Factor 2.2 2.1 2.1 2.1
SK-II 1.9 1.9 1.9 2.0
Shiseido 10.2 10.2 10.1 10.4
Shiseido (Japan)
ÍPSA 1.9 1.9 1.9 1.9

Note: Figures in percentage of total makeup sales in the Hong Kong market; n/a = not available.
Source: Colour Cosmetics in Hong Kong, China, Euromonitor International, May 2016, accessed April 23, 2018,
www.euromonitor.com/colour-cosmetics-in-hong-kong-china/report.

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EXHIBIT 5: COMPOSITION OF MARKET SHARE FOR COMPANIES AND BRANDS IN HONG

KONG—SKIN CARE

Composition of Market Share by Company:

15.3%
14.8% 14.9% 14.9%
14.5%
15%

10.6% 10.7% 10.6%

10.2% 10.3%
10% 9.6%
9.7% 9.6% 9.5% 9.0%
9.5%
8.5% 8.5% 8.5% 8.5% 8.4%

6.9%
6.4%
5% 5.8%
5.3%

0%
2011 2012 2013 2014 2015
AMOREPACIFIC (Korea) L’Oréal (France) Estee Lauder (United States)

Composition of Market Share by Brand:

Company and Origin Brand 2012 2013 2014 2015

LANEIGE 4.1 4.1 4.3 4.5
Sulwhasoo 1.7 2.2 2.6 5.1
AMOREPACIFIC (Korea)
ETUDE HOUSE n/a
Innisfree n/a
Lancôme 4.3 4.4 4.5 4.2

L’Oréal (France) Biotherm 1.9 1.9 1.9 1.8

L’Oréal
1.4 1.4 1.4 1.3
Dermo-Expertise
Estée Lauder 6.6 6.7 6.8 6.4
Estee Lauder (United
Clinique 3.9 3.9 4.0 3.8
States)
Origins 2.2 2.2 2.5 2.9
SK-II 7.1 7.4 7.5 7.4
P&G (United States)
Olay 2.7 2.7 2.7 2.7
Shiseido 5.9 5.8 5.9 5.7
Shiseido (Japan)
ÍPSA 2.6 2.6 2.7 2.6

Note: Figures in percentage of total skin care sales in the Hong Kong market; P&G = Proctor & Gamble; n/a = not available.
Source: Skin Care in Hong Kong, China, Euromonitor International, May 2016, accessed August 1 2016,
www.euromonitor.com/skin-care-in-hong-kong-china/report.

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EXHIBIT 6: BACKGROUND AND PERFORMANCE OF MAJOR BRANDS IN CHINA

Growth Rate Market Share Digital IQ* Top 50 Baidu**

Brand Company and Origin Positioning
by Company (2012) by Company (2012) (2015) Search (2015)
Lancôme L’Oréal (France) Luxury 159 (#1) 46,118,566 (#1)
Shu Uemura L’Oréal (France) Premium 12% 19.7% 97 (#30) n/a
L’Oréal Paris L’Oréal (France) Mass 158 (#2) 34,721,638 (#4)
La Mer Estee Lauder (United States) Upper Luxury 103 (#27) n/a
Estée Lauder Estee Lauder (United States) Luxury 22% 4.1% 150 (#3) 39,364,771 (#2)
Clinique Estee Lauder (United States) Premium 125 (#10) 23,076,947 (#12)
SK-II P&G (United States) Luxury 134 (#6) n/a
Olay P&G (United States) Mass 5% 7.9% 140 (#4) 16,679,337 (#17)
Maybelline New York P&G (United States) Mass 137 (#5) 15,768,135 (#20)
Clé de Peau Beauté Shiseido (Japan) Upper Luxury n/a n/a
Aupres Shiseido (Japan) Luxury 12% 9.7% 118 (#14) n/a
Shiseido Shiseido (Japan) Premium 105 (#25) 17,362,236 (#15)
Sulwhasoo AmorePacific (Korea) Upper Luxury 67 (#74) 25,713,865 (#11)
LANEIGE AmorePacific (Korea) Premium 129 (#9) 28,306,390 (#10)
ETUDE HOUSE AmorePacific (Korea) Mass 31% 2.3% 92 (#38) n/a
Mamonde AmorePacific (Korea) Mass 99 (#29) n/a
Innisfree AmorePacific (Korea) Masstige 131 (#7) 31,417,565 (#6)
Herborist Shanghai Jahwa (China) Premium 17% 2.2% 118 (#14) 3,240,599 (#19)

Note: *Digital IQ was a benchmark for a brand’s digital performance relative to peers, measuring more than 1,250 data points across the four dimensions of digital; **Baidu was China’s
number one search engine, providing indexes for the ranking of brand searches to help understand user behaviour in the Chinese market and indicate which brands in China were in high
demand; the reported index and rankings were extracted from the statistics for Quarter 1, 2016. Herborist was not ranked in the top 20 in Baidu’s 2015 index.
Source: Kim Seung-hwan, “Korean Cosmetics Become Global Standard,” The Korea Times, January 12, 2014, accessed May 17, 2016,
www.koreatimes.co.kr/www/news/biz/2015/12/330_149605.html; “Beauty China 2015,” L2 Digital IQ Index, December 15, 2015, accessed February 20, 2018,
https://www.l2inc.com/research/beauty-china-2015; “Cosmetic Industry Brand List (2015),” Baidu, accessed February 20, 2018, http://index.baidu.com/Helper/?tpl=brand&word=&show=1.

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EXHIBIT 7: MARKETING TOOLS IN THE CONSUMER DECISION JOURNEY

Basic Infrastructure Traditional Marketing Digital Marketing

Social Mobile Analytics Relationship Technology

• Store Design • Print Advertisements • Keyword • Mobile • Keyword • E-newsletters • QR Code

(Ads) Search Search Optimization
• Radio/Television • Banner Ads • Mobile Ad
Commercials • Pop-up Ads
Awareness
• Product Placement (Facebook)
• Events and
Sponsorship
• Outdoor Billboards
• Official Website • Print Ads • Online Videos • Instant
• Press Releases (YouTube) Messaging
• Product Reviews • SNS pages
Comprehension • Brochures (Facebook)
• Blogs and
Forums
• Store Location • Print Ads • Content • Content • Interactive
• Radio/Television Marketing Analysis User Interface
Commercials • Buzz
Liking • Celebrity Marketing
Endorsement

• Payment Methods • Point-of-Purchase • Online • M-commerce • Customized • Customized • GPS Locating

• Ecommerce Displays Promotion • Mobile App Promotion Greetings Service/
Platforms • Free Sampling Campaigns Promotion iBeacon
Action • Personal Selling • SMS Coupon • WiFi Sensors
• Pop-up Stores (RFID)
• Print Coupons • Internet-of-
Things
• Customer Hotline • Mail-in Rebates • Virtual/Online • Platforms for • Email
• Membership Program • Direct Mailings Community Virtual/Online Campaigns
• Member Gatherings • Comment Community
Habit Marketing • SMS
Campaigns

Note: SNS = social networking site; QR = Quick Response; GPS = global positioning system; RFID = radio-frequency identification.
Source: Created by the case authors.

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EXHIBIT 8: OVERVIEW OF AMOREPACIFIC’S USE OF DIGITAL MEDIA IN CHINA, BY BRAND

Technology
and Content
Mobile On-Site
Advertising Ecommerce

Mobile
Tmall
Search

Baidu
Mobile Site
Search

Digital
Video Marketing
Advertising

WeChat Brand Buzz

Sina Weibo

Average LANEIGE Sulwhasoo

ETUDE HOUSE Mamonde Innisfree

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EXHIBIT 8 (CONTINUED)

On-Site Digital
Technology and Baidu Brand Sina Mobile Mobile Mobile
Ecommer Tmall Marketing WeChat Video
Content Search Buzz Weibo Site Search Advertising
ce Advertising
Average 3.3 3.0 2.2 1.9 2.9 2.9 3.0 2.8 2.2 2.9 1.8 2.0
LANEIGE 4.0 4.8 3.7 4.2 3.5 3.6 4.7 3.5 5.4 3.6 2.5 3.4
Sulwhasoo 3.2 0.0 0.0 1.4 2.3 4.6 4.9 2.5 1.0 0.8 1.6 2.7
ETUDE
4.8 4.5 1.7 1.0 2.1 4.5 4.1 3.2 2.6 3.4 1.6 1.9
HOUSE
Innisfree 4.0 4.5 3.5 1.4 4.0 5.4 4.4 4.0 5.5 6.0 2.0 4.1
Mamonde 3.6 4.8 2.9 1.2 2.7 3.4 4.1 3.1 4.5 3.0 2.1 2.5

Note: This chart presents a breakdown of the analysis of L2’s Digital IQ score by dimension, which constitutes more than 1,250 data points across the four dimensions of digital
performance (site and ecommerce, digital marketing, mobile, and social media); the “Average” reported is an average score reported by L2 of the leading cosmetics and skin care
product lines sold in China. The digital IQ score was developed by L2 as a brand-specific benchmark for a company’s digital performance relative to its peers (see “L2 Membership
Product: L2Digital IQ Index,” accessed December 15, 2015, https://www.l2inc.com/about/digital-iq).
Source: Beauty China 2015, L2 Digital IQ Index, December 15, 2015, accessed February 20, 2018, https://www.l2inc.com/research/beauty-china-2015.

EXHIBIT 9: IMPORTANCE OF BRANDS AND MEDIA IN APHK’S BUDGET ALLOCATION

Traditional Digital

LANEIGE 79% 21%

Sulwhasoo 68% 32%

ETUDE HOUSE 23% 77%

AMOREPACIFIC 88% 12%

Source: Company records.

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